Aon | Professional Services Practice
Release Date: May 2022
Inflationary Pressures: Should We Be Worried? Design and Construction Professional Liability Q2 2022
The Professional Services Practice at Aon’s Design and Construction Team review North American market trends for Architects & Engineers and Contractors in Sentinel Issue 19: Q2 2022 Design and Construction Professional Liability.
The COVID-19 pandemic created both public health and economic crises, resulting in a global economic slowdown. But as expected, the economy recovered quickly, and in particular the engineering and construction (E&C) industry has responded well with total construction spending peaking at an annual rate of $1.57 trillion in July 2021, some 12% higher than 2019 average levels.
Estimates suggest that total U.S. construction spending will increase to $1.701 trillion in 2022. The anticipated growth is in partial response to the passage of the U.S. Infrastructure Bill (UIB), although the reality is most of the funding will be disbursed annually in set amounts over a period of five to ten years.
In Canada, the Investing in Canada Plan (2016) is a long-term federal infrastructure plan involving the investment of $188 billion over 12 years. As of November 2021, 74,812 projects have been approved in Canada which represents $101 billion in federal funding.
Despite the buoyant E&C industry, the impacts of the 2020 recession and the pandemic are still being felt with continued disruption in the supply chain, a sharp increase in construction costs, and sub-contractor liquidity issues. All these factors have increased the pressure on profitability, particularly for those firms which had negotiated fixed-price contracts.
Adding to the concerns is the sharp rise in inflation—recently reported as accelerating to 8.5% in March of 2022 in the US—the highest since December of 1981. In addition, the E&C marketplace has seen labor market shortages which can be partially attributed to:
- Fear of both immunization and infection;
- Lack of available/affordable daycare;
- Desire among many in the labor force to work remotely.
The labor and talent shortage means there are less people on the job, which translates to project delays and cancellations, projects being scaled back, inability to respond to market needs, losing project bids, among others.
While it would be logical to expect insured losses to increase in a period of near-record inflation, the losses experienced by the insurance industry over the past twenty-four months have accelerated at a much faster rate than can be explained by economic inflation.
Please click here to access Sentinel Issue 19: Q2 2022 Design and Construction Professional Liability – Inflationary Pressures: Should We Be Worried?
The Professional Services Practice at Aon values your feedback. To discuss any of the topics raised in this article, please contact Michael Earp or Ante Petricevic or Mark J. Peterson.
Architects & Engineers Practice Leader
Mark J. Peterson
Managing Director and Design & Construction Firm Practice Leader